The finance ministry had given its nod to the DIPP’s proposal for allowing 26% foreign direct investment (FDI) by foreign airlines in domestic carriers, but with the rider that such investments should not violate SEBI’s takeover code

New Delhi: In a move to help cash-starved airlines like Kingfisher, the industry ministry is pitching for exemption of the sector from the Securities and Exchange Board of India’s (SEBI) takeover code, which would come in the way of foreign carriers picking up a 26% stake in domestic companies, reports PTI.

The finance ministry had in the first week of December given its nod to the proposal of the Department of Industrial Policy and Promotion (DIPP) for allowing 26% foreign direct investment (FDI) by foreign airlines in domestic carriers.

However, the finance ministry’s consent came with the rider that such investments should not violate SEBI’s takeover code, under which an open offer is triggered once an investor acquires a 26% stake in a listed company.

However, such a situation would lead to a Catch-22 situation, as the open offer trigger would take the FDI in the domestic carrier to 51%, breaching the proposed cap of 26%.

In a letter to the Department of Economic Affairs (DEA), the DIPP has requested “a general exemption from SEBI regulations so that the same are not in conflict with the FDI policy”.

The sources said the DEA would seek an expert opinion on the issue from its capital markets division.

Most of the domestic airlines, including Kingfisher, Spice and Jet Airways, are listed companies and are in dire straits with respect to the state of their finances.

As per the present policy, up to 49% FDI is allowed in domestic carriers, but foreign airlines have been kept out of the option.

The policy tweaking may help the domestic industry get foreign investment.

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“The monsoon has been good for the last two years. We have agricultural growth of 3%-4.5%, which ensures we will get to at least 7%. If policy paralysis continues and agriculture growth does not happen, we could slip below 7%,” industry leader Deepak Parekh said

Hoping that the economic scenario would improve in the New Year, the eminent banker said he was hopeful that 2011 would be forgotten as a bad year and the government would press ahead with its reforms agenda.

“If policy paralysis continues and agriculture growth does not happen, we could slip below 7” Mr Parekh said in an interview with Karan Thapar on the ‘Devil's Advocate’ programme of CNN-IBN news channel.

When asked whether Indian industrialists would stay away from investing in India and would look at overseas opportunities if the policy paralysis continues, Mr Parekh said: “Well, that trend can accelerate.”

“More and more Indians are investing abroad but the market is in India. Everyone knows that the desire for Indian businessmen is to first to invest in India. It is a huge market, large population, large middle class, urbanisation happening. All factors are positive. Only if we can get our act together,” he noted.

Mr Parekh is a member of the Prime Minister’s Council on Trade and Industry and was also part of a group of industry leaders and other eminent citizens that had written two open letters about the current state of affairs of the Indian economy and the need to address the concerns of a policy paralysis.

These issues, along with the various efforts required to be made to spur investments, were also discussed at a meeting this council had with the prime minister last month.

Asked whether India can achieve 8% growth without addressing the issue of policy paralysis and areas of concern with regard to the reform process, Mr Parekh said: “I do not think we will get 8%. We will have to be satisfied with 7%.”

“The monsoon has been good for the last two years. We have agricultural growth of 3%-4.5%, which ensures we will get to at least 7%. If policy paralysis continues and agriculture growth does not happen, we could slip below 7%.”

He, however, said there is a need to hope for the best.

“We have to look at it differently today. We have to be positive. It is a new year. Let us put the past behind us, let us look what we can do and how we can get back to 8% GDP (gross domestic product) growth,” he said.

“The more you criticise the government and the more negative you are about the government, the confidence around you, the confidence of the people of the country, also takes a dip,” Mr Parekh noted.

Mr Parekh expressed confidence the prime minister would live up to expectations.

“I am confident he will. You will see a different set of guidelines and difference in speed at which decisions are taken after February... I am very optimistic that the PM and his team have taken a view, have taken a decision, to not let 2011 continue,” Mr Parekh added.

When asked whether a loss of confidence was the reason for corporates not investing in India, Mr Parekh said: “I do not know if they have lost confidence, but the risk of investments, the approvals, takes a lot of time, it is always risky.”

“They may put large amount of money in a project if it does not take off, then they will be blamed why did you spend so much of money? The risk and the negative accusations...” he said.

Asked about his wish-list from the government to change the mood, Mr Parekh said steps are required to spur investment.

“Secondly, interest rates have to come down gradually.

Food inflation has come down extremely low, interest rates have to come down to spur growth... Thirdly, the approval process has to be streamlined.

“Fourth, there are dozens of projects (that) are struck half-way, particularly in the power sector. These power projects have to be kick-started again,” he said.

Mr Parekh said that pending reforms in areas like taxes, pension, banking and insurance were very critical, especially for the next generation.

“The other thing is, the government must reduce its expenditure. (Then), we must push social projects as 60% of our population, 6,000 million or so live in rural India. How do we make them put more money in their pockets, so that they do more consumption,” he noted.

Asked whether there was a problem of a conflict of interest between the government and the corporate sector, Mr Parekh said: “If you ask me, in the year 2011, the government and the industrialists, instead of coming closer, have become furthered. That trust, that closeness, that association, that one must have to succeed in a country is diminished.”

He said it is the responsibility of both parties to reach out to each other, but also criticised the trend of industrialists approaching the government for help when a particular industry is not working well.

Asked whether the business confidence was lower than even 2008 levels, he replied in the affirmative.

“... Fresh investments are not happening. We need massive investments in India, both from the public sector as well as the private sector, and neither are investing,” he said.

Talking about the widespread concerns of a governance deficit, Mr Parekh said: “When we talk of governance deficit. We are talking at two levels. One is petty corruption, which you and I and everyone in India faces, and one is the corruption at the senior level, like the Commonwealth Games, telecom scam...”

“The common man in India is corrupt because he cannot get anything done without paying a bribe... I myself had to pay for a death certificate. We need some redressal mechanism for this problem. We need police reform, judicial reform,” he said.

However, they also sold shares and bonds worth Rs8,674 crore in the same period, translating into a net investment of Rs6,494 crore for the period, according to information available with the Securities and Exchange Board of India (SEBI).

Market experts believe that positive global cues along with lower food inflation number helped boost investor confidence in the market during the week.

Investors were more bullish on the debt market in the first week, making a net investment of Rs5,488 crore during the period, while their investment in stocks stood at Rs1,006 crore.

Buoyed by FII inflow, the stock market barometer Sensex (of the BSE) gained 413 points or 2.67% to close at 15,867.73 on the last trading session at Friday.

Meanwhile, an announcement was made by the government on 1st January allowing qualified foreign investors (QFIs), including overseas individuals to invest directly in Indian stock markets. This has been done with the intention of widening the profile of investors and attracting more foreign funds in the wake of FII money being withdrawn from the markets.

The move is also expected to reduce market volatility and deepen the Indian stock markets. Earlier, QFIs were permitted to invest only in mutual find schemes. The foreign nationals could earlier invest into Indian markets through opening accounts with SEBI registered FIIs or through participatory notes.

In the year 2011, FIIs purchased stocks and bonds worth Rs8 lakh crore, but sold securities worth Rs7.9 lakh crore, resulting into a investment of Rs1,7480 crore for the year.

However, investors have flocked towards the debt market and made an investment of Rs20,293 in the year 2011, while at the same time they stayed away from equity market and pulled out Rs2,812 crore.